Buying a home comes with a lot of risks. The process is lengthy and has room for many things to go awry. Thankfully, layers of protection within a contract help eliminate some risks. These layers of security are called contingencies and offer a safety net for homebuyers and sellers too.
However, in a competitive market where inventory is low, remote work has shuffled around homebuyers, all-cash offers are common, and people are paying double-digit percentages above asking, these contingencies become a risk in their own way. An offer with contingencies becomes less appealing, and some homebuyers turn to waiving them to stay competitive.
Waiving these important clauses can be very risky, though. First, you must understand what a mortgage contingency clause is and why it’s there to protect you before you decide when to waive it. Sometimes it can be a good decision. Think carefully about your financial situation and talk with your exclusive buyer’s agent before you decide to waive a mortgage contingency.
What Is a Mortgage Contingency?
A mortgage contingency is a condition in which a homebuyer is protected if they are not approved for a mortgage loan by the bank. To secure a mortgage, a homebuyer must go through the application process and be pre-approved by the bank for the mortgage. However, sometimes the application is not approved, and the homebuyer cannot secure the money for the home.
To show that a homebuyer is serious about purchasing the home before getting their mortgage loan, they’ll put down an earnest money deposit, or EMD, as a show of good faith. However, once that money has been put down, homebuyers risk losing it if they change their mind about purchasing the home. A mortgage contingency protects them by allowing them to walk away if they cannot secure the loan, but not simply because they don’t want to buy the house.
It’s standard for a real estate contract to include multiple contingencies, one being a mortgage contingency. Unless under certain conditions stated in the contract, neither party can exit the deal without being liable for legal action due to these contingencies.
How Does a Mortgage Contingency Work?
A mortgage contingency specifies the time that homebuyers have to secure financing for the home purchase. If they cannot secure a mortgage loan in the given timeframe, a mortgage or loan contingency allows them to walk away with their earnest money deposit. For the seller, it’s back to the drawing board in hopes of finding a qualified buyer.
A typical loan contingency period will be anywhere from 30 to 60 days unless otherwise decided by both the buyer and seller. The contingency period must be fully agreed upon and can be negotiated. Before closing can begin, the buyer must secure financing and be fully approved for a mortgage.
What’s Included In a Mortgage Contingency?
The exact wording of each mortgage contingency will vary from one deal to the next. But most will only allow the buyer to back out and get their deposit back if they do not directly cause the financing to fail through an act of bad faith. It’s common for the time period to be stated, the type of mortgage required, and the amount of money needed.
The most common terms by which the buyer can claim the mortgage contingency are:
- They have applied for the loan within a specified period after receiving the fully executed contract
- The buyer has filled out the loan application in a truthful and accurate manner and provided all necessary information to the lender
- They have abided by all terms presented by the lender as part of the application process
- The buyer has not applied to borrow more than what was specified in the mortgage contingency
- Once the buyer has their loan commitment letter, they must proceed with the deal. They can no longer activate the mortgage contingency, back out of the deal, or get their deposit back if they do
Why Would a Buyer Waive the Mortgage Contingency?
In a tough market with limited inventory, sellers have many options when it comes to choosing a buyer. To remain competitive, homebuyers will remove contingencies to make their offer more appealing. Contingencies can slow down the process or open the possibility for a buyer to back out of the deal, thus leaving the seller empty-handed.
The best offers will be from an all-cash buyer with no contingencies, followed by an all-cash offer with contingencies. After those two, an offer from someone financing with no contingencies is preferred over an offer from someone who is financing with contingencies. As this suggests, dropping some contingencies will make your offer more attractive if you’re financing.
When Should You Waive a Contingency?
Mortgage contingencies should be waived when you’re in a competitive market, and you need to make your offer more appealing. Thankfully, your exclusive buyer’s agent can provide information from the listing agent on the competition and how attractive your offer is. Waiving the mortgage contingency may be one of those suggestions to make your offer much more appealing; however, it’s not always necessary.
Is Mortgage Contingency Necessary, or Should You Waive It?
A mortgage contingency isn’t necessary, but it shouldn’t always be waived. The decision to waive the mortgage contingency carried a lot of risks. If you fail to obtain a mortgage within the contingency period, you will lose your ability to recover your deposit and back out of the deal. The decision to waive them comes down to your comfort level with a significant financial loss.
What Are the Risks of Waiving a Mortgage Contingency?
The main risk in waiving a mortgage contingency is losing your EMD. The EMD or down payment is a large sum of money, which means you may be at risk of an amount in the tens of thousands of dollars. Even if you feel confident that you will be approved for financing, there’s always a chance that something could go wrong at the last minute.
During the mortgage application process, a lender may change their underwriting criteria, or you could suffer a job loss leaving you open to nonacceptance. You can mitigate rejection risks by getting PREAPPROVED FOR A MORTGAGE and confirming with the lender that the property has no outstanding liens.
Is It Smart to Waive Contingencies?
Sometimes it can be a wise decision. Deciding to waive the mortgage contingency could mean the difference between getting your dream home or not. But it’s a decision that should be carefully weighed first. Find an EXCLUSIVE BUYER’S AGENT, and talk with them and your lender before making the decision. If your mortgage is not approved, you could stand to lose a lot more than just the chance to buy the property.